Concern about keeping too much at one onvestment firm?

[Numbers]

I have some decent sized investments coming my way due to family loss; and have thus far - part by design, part by job changes, etc... managed to both build up a nice portfolio already, that is also not too concentrated at one investment firm. EG as a couple we have very nice chunks at Fidelity, TD Ameritrade, and a couple others that are smaller (primarily current jobs, with nothing special in the 401K plans so left others with prior employers with better plans or in our previously aggregated rollovers/Roth's).

The basic question being how much spread is necessary with no FDIC backing, etc... and not wanting a Lehman Brothers or Madoff scenario where too much of our wealth is at any one firm (you just never know what a firm/others will do with your funds when they hit the end of their road and are desperate). I also don't want to manage dozens of accounts all over the place per say either. Just thinking out loud to see if I'm over-analyzing the risks. I'm currently thinking of moving the incoming assets to perhaps a new Vanguard account. (I will add the concern is not about spreading a few hundred $K around between several vendors).

Anyone else ever have this concern?

[nereo]

JL Collins wrote a good piece on exactly this.
The short version is that Vanguard is not compatible to, say, Bernie Madoff. For starters it’s client owned, and your money is actually invested in shares of the companies which compose whatever index fund you hold, not in “Vanguard - the company”. It’s a brokerage, not a hedge fund.

https://jlcollinsnh.com/2012/09/07/stocks-part-x-what-if-vanguard-gets-nuked/

[cool7hand]

+1 on the above. This topic comes up every other month or so in this forum. The majority consensus is generally that one need not worry about this, although a strident minority breaks up their investments in multiple institutions.

[MustacheAndaHalf]

Correct me if I'm wrong, but I believe no scam has involved both an investment firm and a custodian of that firm's assets.  Madoff kept all assets and records in house, with no external custodian.  They are a hedge fund, which allows them to force client to perform due diligence, without having to follow rules imposed on mutual funds.

https://personal.vanguard.com/pdf/s317.pdf
"... the Investment Company Act of 1940. This act requires each mutual fund to place its cash and securities with a qualified custodian, typically a U.S. bank.
... These banks include The Bank of New York Mellon, Brown Brothers Harriman & Co., JPMorgan Chase Bank, and State Street Bank and Trust Company."

"your assets are protected through the Securities Investor Protection Corporation (SIPC)"


So if you invest in a mutual fund, that's covered under the 1940 act (you can also verify that on other sites besides Vanguard's).  But hedge funds rely on investors savvy enough to do their own due diligence, and do not fall under the 1940 act.

[ender]

We've accidentally done this in that our IRAs are at Vanguard and my 401k is at Fidelity and the amounts are comparable.

But for simplicity I'm still tempted to move everything over to one institution (Fidelity in my case).

[reeshau]

Protection against a Madoff-type scenario can be had by checking if the brokerage is a member of SIPC.

https://www.sipc.org/for-investors/what-sipc-protects

The limit of that protection is $500k.  However, most brokerages also purchase private insurance that kicks up protection into the millions.

SIPC protection protects against the loss of funds in your account.  However, it does not protect against the loss of value of holdings in your account.  So, if your Fidelity account held a bunch of Lehman CDO's in 2008, you would still lose your money.

[Numbers]

Thanks for your responses. Still mulling it over in my mind to see if I'm one of the strident minority to want to split up my assets. I was unaware of SIPC covering $500K in case of investment custodian abuses which is certainly good to know.

nereo, it's also interesting to see JLcollins thoughts on the topic. However, it doesn't prevent a brokerage from liquidating customer assets or using customer cash as a desperate maneuver. EG while the mutual fund itself is it's own legal entity and still exists and its assets are placed with a US bank or etc..., perhaps my shares in it would no longer exist as a brokerage firm put in fraudulent orders on my behalf in a desperate bid to shore itself up in some manner. Just trying to clarify my concerns.

Though MustacheAndaHalf does have a good point in that both investment and brokerage have thus far never conspired/failed together thus far.

I guess that's where SIPC comes into play as it seems unlikely any of the large investment brokerages would or would even be able to liquidate customer assets very fast even in desperate times (it would clog the market and be immediately noticed/plummet prices).

Interestingly I recently found out my parents owned a small bit of Lehman Brothers once upon a time. Thank goodness it was a very, very small holding of theirs (not sure why they bothered with such a small holding really). In such a case when that asset goes to zero, it goes to zero. For those keeping score for brokerage investors of theirs, all individual investor accounts at Lehman were transferred to solvent brokerages within a pretty short window with no losses. It was commercial/hedge fund types that had issues and stuck in limbo for up to 5 years which caused a few hedge funds to fail due to not being able to actively invest/lost opportunities and etc...

[Ron Scott]

I personally feel the risk you’re concerned about falls in black swan territory—extremely unlikely but hugely impactful if it does. So whether your concern puts you in the minority or not is meaningless. There’s usually little downside to running a few institutions so why not?

[RyanAtTanagra]

I split up investments because of a different concern: identity theft and getting my assets stolen.  Because I've pissed off the wrong people before and had my real life fucked with (thankfully before I had anything to steal).  So I moved my IRAs to one firm and have my taxable at another.  2 brokerages doesn't really add complications, and not having 100% of my assets in one location helps me sleep better.

[mntnmn117]

I split up investments because of a different concern: identity theft and getting my assets stolen.  Because I've pissed off the wrong people before and had my real life fucked with (thankfully before I had anything to steal).  So I moved my IRAs to one firm and have my taxable at another.  2 brokerages doesn't really add complications, and not having 100% of my assets in one location helps me sleep better.

This just dawned on me after consolidating accounts at one institution. Kinda facepalm, like why did I go through that effort and now I'm one good hack away from financial ruin?

[RyanAtTanagra]

I split up investments because of a different concern: identity theft and getting my assets stolen.  Because I've pissed off the wrong people before and had my real life fucked with (thankfully before I had anything to steal).  So I moved my IRAs to one firm and have my taxable at another.  2 brokerages doesn't really add complications, and not having 100% of my assets in one location helps me sleep better.

This just dawned on me after consolidating accounts at one institution. Kinda facepalm, like why did I go through that effort and now I'm one good hack away from financial ruin?

Well to be fair, I'm the only one I know that has this specific concern, so I doubt it's very valid, but I have a hard time letting it go.  And since personal finance is mostly psychological, sometimes you have to do what lets you sleep better at night.

[trollwithamustache]

If you are concerned about  a major financial firm like Vanguard failing, you should buy a shotgun, plenty of ammo and start stockpiling food.

[scottish]

+1 on the above. This topic comes up every other month or so in this forum. The majority consensus is generally that one need not worry about this, although a strident minority breaks up their investments in multiple institutions.

I'm not strident!

It's more likely that some weird incident (for example, identify theft as someone mentioned upstream) would wind up locking your accounts for a few weeks or months at one institution than it is that a bank or brokerage would outright collapse.

Also if you have large accounts at two institutions you can use this as negotiating leverage if necessary.   Although lately I find they're bending over backwards to be helpful, so maybe this isn't necessary with large accounts.

The downside is you have to keep track of 2 sets of accounts, online interfaces, phone numbers and so on.

Do what helps you sleep at night.

[maizefolk]

I don't worry about how spread out my my main investments are.

I do sleep better at night knowing I have two cash accounts at separate banks (one national chain, one local credit union) that each have enough cash to cover a few months of expenses and/or one big unexpected expense.

I don't think there is a risk of long term loss from either, but I could certainly end up temporarily locked out of one for a period of time as a result of anything from identity theft to cyberattack to bank failure (although given how fast the FDIC has historically stepped in bank failure would probably be resolved faster than either of the other two).

[trollwithamustache]

+1 on the above. This topic comes up every other month or so in this forum. The majority consensus is generally that one need not worry about this, although a strident minority breaks up their investments in multiple institutions.

I'm not strident!

It's more likely that some weird incident (for example, identify theft as someone mentioned upstream) would wind up locking your accounts for a few weeks or months at one institution than it is that a bank or brokerage would outright collapse.

Also if you have large accounts at two institutions you can use this as negotiating leverage if necessary.   Although lately I find they're bending over backwards to be helpful, so maybe this isn't necessary with large accounts.

The downside is you have to keep track of 2 sets of accounts, online interfaces, phone numbers and so on.

Do what helps you sleep at night.

OK, I guess I had assumed that everyone here has a bank account. We can comfortably live for 6 months on whats in that account.  For my mom, we keep 2 years in cash in her bank savings account. That way we are never in a position to really have to sell stock.

[RyanAtTanagra]

OK, I guess I had assumed that everyone here has a bank account.

My checking and saving is at my investment firm ;-)  Which probably also fueled my desire to split things up.

[YttriumNitrate]

While I'm not concerned about Fidelity or Vanguard going the way of Bernie Madoff, there is some advantage to having multiple accounts at different institutions.

For example, if you wanted to trade AMC back in January and you had everything at TD Ameritrade, you might be out of luck. If some of your assets were at another brokerage you would have a better chance at being able to trade the stock.
https://www.thestreet.com/investing/robinhood-ameritrade-online-brokerages-gamestop-amc

[RyanAtTanagra]

While I'm not concerned about Fidelity or Vanguard going the way of Bernie Madoff, there is some advantage to having multiple accounts at different institutions.

For example, if you wanted to trade AMC back in January and you had everything at TD Ameritrade, you might be out of luck. If some of your assets were at another brokerage you would have a better chance at being able to trade the stock.
https://www.thestreet.com/investing/robinhood-ameritrade-online-brokerages-gamestop-amc

So having all your assets locked up in an investment firm with fewer trading options can keep you from making dumb financial decisions?  ;-)  Add that one to the Pros lists.

[YttriumNitrate]

So having all your assets locked up in an investment firm with fewer trading options can keep you from making dumb financial decisions?  ;-)  Add that one to the Pros lists.

I do not share your confidence that stress failures of major trading platforms will only ever associated with dumb financial moves.

[RyanAtTanagra]

So having all your assets locked up in an investment firm with fewer trading options can keep you from making dumb financial decisions?  ;-)  Add that one to the Pros lists.

I do not share your confidence that stress failures of major trading platforms will only ever associated with dumb financial moves.

What are the counter examples?

[Telecaster]

I don't worry about how spread out my my main investments are.

I do sleep better at night knowing I have two cash accounts at separate banks (one national chain, one local credit union) that each have enough cash to cover a few months of expenses and/or one big unexpected expense.

I don't think there is a risk of long term loss from either, but I could certainly end up temporarily locked out of one for a period of time as a result of anything from identity theft to cyberattack to bank failure (although given how fast the FDIC has historically stepped in bank failure would probably be resolved faster than either of the other two).

That's my view as well.  The risk is low, and the inconvenience is probably low as well.  But splitting assets between two brokerages is not very hard either.  If some Bad Thing happens to one brokerage, the other will still be accessible.